Fallout: The Financial Crisis

Is Fed inaction a good thing?

John Dimsdale Jun 24, 2009
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Fallout: The Financial Crisis

Is Fed inaction a good thing?

John Dimsdale Jun 24, 2009
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TEXT OF STORY

Kai Ryssdal: This was just another day in the life of a central bank stuck in the middle of a recession, I suppose. Chairman Bernanke and his colleagues at the Federal Open Market Committee have already brought interest rates down to almost zero. Banks still do have to pay a quarter of one percent to borrow from each other overnight.

The Fed has set up trillions of dollars in loan and guarantee programs for the financial industry in the hopes of getting banks lending again. Which means, really, all they had to do at their meeting that wrapped up today was agree on what to tell us. The statement that the Fed puts out after every meeting is analyzed as closely as who got to stand next to who at the Kremlin back in the old Soviet Union days. Our Washington bureau chief John Dimsdale reports on what it had to say today.


JOHN DIMSDALE: Fed members said they plan to keep interest rates near zero for quote an extended period. They’ll also continue to inject cash into the economy by buying bank assets and government debt. The central bankers say their strategy is helping to turn the economy around. But some economists had been looking for the Fed to acknowledge that their policy of, in effect, printing money, risks inflation. Martin Regalia is the chief economist at the Chamber of Commerce.

MARTIN REGALIA: I think there’s still concern out there that the monetary spigot will be left on too long, and we’ll end up creating inflation down the road a bit.

Fed members did make note of rising commodity prices and took out a reference they made after their April meeting, about the threat of deflation. Alan Levenson, the chief economist at T. Rowe Price thinks the Fed is signaling they know inflation is the next monetary battle on the horizon.

ALAN LEVENSON: To speak too strongly about inflation risks as a consequence of what they’re doing, when they’re still trying to get the economy out of a recession, I think is just way premature.

But for inflation hawks, like Regalia, today’s Fed statement wimped out.

REGALIA: For a Fed that is claiming transparency, this is kind of a reversion to the old Fedspeak where you listen and read carefully three or four times only to shake your head and say, I really don’t know what they just said.

Still, for now, the Fed can keep interest rates low because the slow recovery is keeping inflation in check.

In Washington, I’m John Dimsdale for Marketplace.

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